CERNER CORP /MO/ - 10-Q Quarterly Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) with the Commission, and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

There were 35,426,698 shares of Common Stock, $.01 par value, outstanding at September 27, 2003.


Part I	Financial Information:
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of September 27, 2003 (unaudited) and December 28, 2002	1
	Condensed Consolidated Statements of Earnings for the three and nine months ended September 27, 2003 and September 28, 2002 (unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 27, 2003 and September 28, 2002 (unaudited)	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
Part II	Other Information:	19
Item 1.	Legal Proceedings	19
Item 6.	Exhibits and Reports on Form 8-K	20


			September 27,			December 28,
(In thousands)			2003			2002

			(unaudited)
Assets
	Current Assets:
	Cash and cash equivalents		$	119,805		$	142,543
	Receivables			252,296			272,668
	Inventory			10,435			9,041
	Prepaid expenses and other			24,680			23,434

	Total current assets			407,216			447,686
	Property and equipment, net			173,154			134,283
	Software development costs, net			134,820			117,327
	Goodwill, net			47,222			45,938
	Intangible assets, net			20,850			23,155
	Investments, net			1,156			964
	Other assets			7,344			9,926

			$	791,762		$	779,279

Liabilities and Stockholders’ Equity
	Current Liabilities:
	Accounts payable		$	29,255		$	46,822
	Current installments of long-term debt			12,235			12,202
	Deferred revenue			53,805			45,055
	Income taxes			12,919			4,691
	Accrued payroll and tax withholdings			38,952			47,262
	Other accrued expenses			10,832			9,519

	Total current liabilities			157,998			165,551
	Long-term debt			124,386			136,636
	Deferred income taxes			39,906			35,848
	Minority owners’ equity interest in subsidiary			1,166			—
	Stockholders’ Equity:
	Common stock, $.01 par value, 150,000,000 shares authorized, 36,929,697 shares issued at September 27, 2003 and 36,732,532 issued in 2002			369			367
	Additional paid-in capital			230,399			226,912
	Retained earnings			263,155			236,572
	Treasury stock, at cost (1,502,999 and 1,202,999 shares in 2003 and 2002, respectively)			(26,793	)		(20,863	)
	Accumulated other comprehensive income:
		Foreign currency translation adjustment		1,099			(1,668	)
		Unrealized gain/(loss) on available-for-sale equity securities (net of deferred tax liability of $43 for 2003 and deferred tax asset of $23 in 2002)		77			(76	)

		Total stockholders’ equity		468,306			441,244

			$	791,762		$	779,279

CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)


		Three Months Ended						Nine Months Ended

		September			September			September			September
		27,			28,			27,			28,
		2003			2002			2003			2002

(In thousands, except per share data)
Revenues:
	System sales	$	80,193		$	84,866		$	241,529		$	239,401
	Support, maintenance and services		118,774			105,465			347,946			306,783
	Reimbursed travel		7,325			6,658			22,703			19,051

	Total revenues		206,292			196,989			612,178			565,235

Costs and expenses:
	Cost of revenues		45,435			43,829			146,783			135,660
	Sales and client service		84,794			82,166			259,531			233,421
	Software development		39,255			33,850			115,170			95,112
	General and administrative		15,083			13,216			41,374			37,558

	Total costs and expenses		184,567			173,061			562,858			501,751

Operating earnings			21,725			23,928			49,320			63,484
Other income (expense):
	Interest expense, net		(1,703	)		(1,245	)		(5,152	)		(4,141	)
	Other income		24			33			167			64
	Gain on sale of investment		—			—			—			4,308

	Total other, net		(1,679	)		(1,212	)		(4,985	)		231

Earnings before income taxes and cumulative effect of a change in accounting principle			20,046			22,716			44,335			63,715
Income taxes			(7,999	)		(8,948	)		(17,752	)		(24,851	)

Earnings before cumulative effect of a change in accounting principle			12,047			13,768			26,583			38,864
Cumulative effect of a change in accounting for goodwill, net of $486 income tax benefit			—			—			—			786

Net earnings			12,047			13,768			26,583			38,078

Basic earnings per share:
Earnings before cumulative effect of a change in accounting principle		$	.34		$	.39		$	.75		$	1.10
Cumulative effect of a change in accounting for goodwill			—			—			—			(.02	)

Net earnings per share		$	.34		$	.39		$	.75		$	1.08

Basic weighted average shares outstanding			35,359			35,496			35,437			35,438
Diluted earnings per share:
Earnings before cumulative effect of a change in accounting principle		$	.33		$	.37		$	.73		$	1.05
Cumulative effect of a change in accounting for goodwill			—			—			—			(.02	)

Net earnings per share		$	.33			.37		$	.73			1.03

Diluted weighted average shares outstanding			36,365			36,913			36,259			37,189

CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


			Nine Months Ended

			September 27, 2003			September 28, 2002

(In thousands)
Cash flows from operating activities:
	Net earnings		$	26,583		$	38,078
	Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
		Depreciation and amortization		50,172			41,521
		Goodwill impairment		—			1,272
		Gain on sale of investment		—			(4,308	)
		Non-employee stock option compensation expense		23			34
		Provision for deferred income taxes		4,174			1,519
		Payment of tax on gain from the sale of WebMD		—			(31,200	)
	Changes in assets and liabilities:
		Receivables, net		24,703			(42,489	)
		Inventory		(1,394	)		(2,351	)
		Prepaid expenses and other		(3,559	)		(7,948	)
		Accounts payable		(17,270	)		14,613
		Accrued income taxes		7,964			14,326
		Deferred revenue		8,018			(23,343	)
		Other accrued liabilities		(7,589	)		(5,356	)

	Total adjustments			65,242			(43,710	)

	Net cash provided by (used in) operating activities			91,825			(5,632	)

Cash flows from investing activities:
		Purchase of capital equipment		(17,380	)		(29,279	)
		Purchase of land, buildings and improvements		(40,716	)		(18,822	)
		Acquisition of business, net of cash aquired		—			(19,129	)
		Proceeds from sale of available-for-sale securities		—			90,119
		Repayment of notes receivable		305			—
		Capitalized software development costs		(43,720	)		(36,089	)

	Net cash used in investing activities			(101,511	)		(13,200	)

Cash flows from financing activities:
		Proceeds from issuance of long-term debt		867			10,102
		Repayment of long-term debt		(13,084	)		(12,808	)
		Purchase of treasury stock		(5,930	)		—
		Proceeds from exercise of options		3,893			2,726
		Associate stock purchase plan discounts		(427	)		(430	)

	Net cash used in financing activities			(14,681	)		(410	)

Foreign currency translation adjustment				1,478			264

Increase in cash from the consolidation of a variable interest entity				151			—

	Net decrease in cash and cash equivalents			(22,738	)		(18,978	)
	Cash and cash equivalents at beginning of period			142,543			107,536

	Cash and cash equivalents at end of period		$	119,805		$	88,558

CERNER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K.

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position, and the results of operations and cash flows for the periods presented. The results of the three and nine-month periods are not necessarily indicative of the operating results for the entire year. Certain prior year amounts have been reclassified to conform with current year presentation.

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” establishes requirements for reporting and display of comprehensive income and its components. For the nine months ended September 27, 2003 and September 28, 2002, total Comprehensive Income, which includes net earnings, foreign currency translation adjustments and unrealized gains and losses on available-for-sale equity security adjustments, amounted to $29,503,000 and $26,326,000, respectively.

The Company incurs out-of-pocket expenses in connection with its client service activities, which are reimbursed by its clients. The amounts of “out-of-pocket” expenses, which are included in the cost of revenues in the accompanying Statement of Earnings, and equal amounts of related reimbursements were $7,325,000 and $6,658,000 for the three months and $22,703,000 and $19,051,000 for the nine months ended September 27, 2003 and September 28, 2002, respectively.

The terms of the Company’s software license agreements with its clients generally provide for a limited indemnification of such intellectual property against losses, expenses and liabilities arising from third-party claims based on alleged infringement by the Company’s solutions of an intellectual property right of such third party. The terms of such indemnification often limit the scope of and remedies for such indemnification obligations and generally include a right to replace or modify an infringing solution. To date, the Company has not had to reimburse any of its clients for any losses related to these indemnification provisions pertaining to third-party intellectual property infringement claims. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the terms of the corresponding agreements with its clients, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

On September 27, 2003, the Company adopted Financial Accounting Standards Board Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities an Interpretation of APB No. 51.” The Interpretation provides guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprises should consolidate the VIE (the “primary beneficiary”). In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures.

For the three-month and nine-month period ended September 27, 2003, the Company consolidated the operations of Cerner Arabia Ltd (“Cerner Arabia”). Cerner Arabia is a software company located in Riyadh. Revenues are derived primarily from the sale of clinical, financial and administrative information systems and solutions. The consolidation of Cerner Arabia resulted in an increase to revenues of $291,000 and net earnings of $39,000 for the nine-month period ended September 27, 2003.

Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. A reconciliation of the numerators and denominators of the basic and diluted per-share computations is as follows:


	Three months ended							Three months ended
	September 27, 2003							September 28, 2002

	Earnings			Shares		Per-Share		Earnings			Shares		Per-Share
	(Numerator)			(Denominator)		Amount		(Numerator)			(Denominator)		Amount

(In thousands, except per share data)
Basic earnings per share
Income available to common stockholders		$	12,047		35,359	$	.34		$	13,768		35,496	$	.39
Effect of dilutive securities
Stock options			—		1,006					—		1,417
Diluted earnings per share

Income available to common stockholders including assumed conversions		$	12,047		36,365	$	.33		$	13,768		36,913	$	.37

Options to purchase 2,961,000 and 2,868,000 shares of common stock at per share prices ranging from $31.50 to $273.72 and $39.95 to $574.82 were outstanding at the three-months ended September 27, 2003 and September 28, 2002, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares during the period.


	Nine months ended						Nine months ended
	September 27, 2003						September 28, 2002

	Earnings		Shares		Per-Share		Earnings		Shares		Per-Share
	(Numerator)		(Denominator)		Amount		(Numerator)		(Denominator)		Amount


Earnings per share before cumulative effect of a change in accounting principle

(In thousands, except per share data)
Basic earnings per share
Income available to common stockholders	$	26,583		35,437	$	.75	$	38,864		35,438	$	1.10
Effect of dilutive securities
Stock options		—		822				—		1,751
Diluted earnings per share

Income available to Common stockholders including assumed conversions	$	26,583		36,259	$	.73	$	38,864		37,189	$	1.05

Net earnings per share
Basic earnings per share
Income available to common stockholders	$	26,583		35,437	$	.75	$	38,078		35,438	$	1.08
Effect of dilutive securities
Stock options		—		822				—		1,751
Diluted earnings per share

Income available to common stockholders including assumed conversions	$	26,583		36,259	$	.73	$	38,078		37,189	$	1.03

Options to purchase 3,683,000 and 1,334,000 shares of common stock at per share prices ranging from $29.15 to $273.72 and $46.23 to $574.82 were outstanding at the nine-months ended September 27, 2003 and September 28, 2002, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares during the period.

The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations including FASB Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25,” issued in March 2000, to account for its fixed–plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. The following is a reconciliation of reported net earnings to adjusted net earnings had the Company recorded compensation expense based on the fair value at the grant date for its stock options under SFAS 123 for the three and nine months ended September 27, 2003 and September 28, 2002.


	Three months ended						Nine months ended

	September			September			September			September
	27, 2003			28, 2002			27, 2003			28, 2002

Reported net earnings	$	12,047			13,768			26,583			38,078
Less: stock-based compensation expense determined under fair-value-based method for all awards		(2,983	)		(4,395	)		(9,527	)		(12,906	)

Pro-forma net earnings		9,064			9,373			17,056			25,172

Basic earnings per share:
Reported net earnings	$	.34			.39			.75			1.08
Less: stock-based compensation expense determined under fair-value-based method for all awards, net of tax		(.08	)		(.12	)		(.27	)		(.36	)

Pro-forma net earnings		.26			.27			.48			.72

Diluted earnings per share:
Reported net earnings	$	.33			.37			.73			1.03
Less: stock-based compensation expense determined under fair-value-based method for all awards		(.08	)		(.12	)		(.26	)		(.35	)

Pro-forma net earnings		.25			.25			.47			.68

Pro forma net earnings reflect only options granted since January 1, 1995. Therefore, the full impact of calculating compensation expense for stock options under FAS 123 is not reflected in the adjusted net earnings amounts presented above, because compensation cost is reflected over the options’ vesting period of ten years for these options. Compensation expense for options granted prior to January 1, 1995 is not considered.

On September 29, 2003, the Company completed the purchase of BeyondNow Technologies, Inc. (“BeyondNow”) for approximately $7.5 million in cash. BeyondNow develops home care technologies that reduce administrative paperwork, provide clinicians with remote access to charts, accelerate third-party reimbursement and share information between the home care setting and hospitals. Cerner intends to integrate the BeyondNow technology into the Cerner Millennium^® technology platform. This acquisition is not expected to have a material impact on operations. The Company is in the process of obtaining information to determine the allocation of the purchase price to the net assets acquired.

On October 1, 2002, the Company completed the purchase of Image Devices GmbH (“Image Devices”) for approximately $14.3 million in cash. Approximately $5.7 million was paid in the third quarter of 2002; $7.2 million was paid in the fourth quarter of 2002; and approximately $1.4 million will be paid in the third quarter of 2004. Image Devices is a picture archiving and communication system software developer based near Frankfurt, Germany. A Cerner component supplier since 1999, Image Devices develops and supplies the image archive component for Cerner ProVision ™ PACS. The allocation of the purchase price to the estimated fair values of the identified tangible and intangible assets acquired and liabilities assumed, resulted in goodwill of $11.9 million and $4.4 million in intangible assets that will be amortized over five years.

On April 30, 2002, the Company purchased Zynx Health, Incorporated (Zynx) for $15 million in cash and $8.5 million in software credits. The Company will not recognize revenues related to the utilization of these software credits as the Company considered the exchange of software credits for Zynx content as an exchange of similar productive assets, which will be accounted for at book value. In the event the software credits are not utilized over the next five years, the Company will make additional cash payments of up to $7.5 million depending on the level of the credits used. Those additional payments, if made, will result in additional goodwill. Zynx is widely recognized for advancing evidence-based medicine through solutions and services that deliver the latest scientific knowledge and best practices. Cerner is in the process of integrating the evidence-based content from Zynx into the Cerner Millennium ^® technology platform. The allocation of the purchase price to the estimated fair values of the identified tangible and intangible assets acquired and liabilities assumed, resulted in goodwill of $10.7 million and $3.3 million in intangible assets that will be amortized over five years.

In the second quarter of 2002, the Company sold its remaining 14,820,527 shares of WebMD for $90,119,000. Accordingly, the Company recorded an investment gain of $2,736,000, net of $1,572,000 in tax, as a result of the sale.

Receivables consist of accounts receivable and contracts receivable. Accounts receivable represent recorded revenues that have been billed. Contracts receivable represent recorded revenues that are billable by the Company at future dates under the terms of a contract with a client. Billings and other consideration received on contracts in excess of related revenues recognized under the percentage-of –completion method are recorded as deferred revenue. A summary of receivables is as follows:

The Company provides an allowance for estimated uncollectible accounts based upon historical experience and management’s judgement. At September 27, 2003 and December 28, 2002 the allowance for estimated uncollectible accounts was $11,155,000 and $9,502,000, respectively.

Goodwill and intangible assets with indefinite lives are evaluated for impairment annually or whenever there is an impairment indicator. All goodwill is assigned to a reporting unit, where it is subject to an impairment test based on fair value. The Company completed its review of the Company’s goodwill values in the second quarter of 2002. As a result of this review, the Company determined that goodwill arising from the acquisition of Mitch Cooper and Associates was impaired due to declining demand and margins in this business. Mitch Cooper and Associates was a supply chain re-engineering consulting practice. The impairment charge to reflect this goodwill at fair value was $786,000, net of tax and is reflected as a cumulative effect of a change in accounting principle as of the beginning of 2002. The Company used a discounted cash flow analysis to determine the fair value of the reporting units. The Company’s 2003 review of goodwill was completed in the second quarter of 2003 and indicated that goodwill was not impaired.

The Company’s intangible assets, other than goodwill or intangible assets with indefinite lives, are all subject to amortization and are summarized as follows:


			September 27, 2003				December 28, 2002

	Weighted
	Average		Gross				Gross
	Amortization		Carrying		Accumulated		Carrying		Accumulated
	Period (Yrs)		Amount		Amortization		Amount		Amortization

Purchased software		5.0	$	31,288		12,923		28,938		8,649
Customer lists		7.0		3,700		1,579		3,700		1,183
Patents		14.0		414		80		377		63
Non-compete agreements		7.0		50		20		50		15

Total		5.32	$	35,452		14,602		33,065		9,910

Aggregate amortization expense for the nine months ended September 27, 2003 and September 28, 2002 was $4,582,000 and $3,018,000 respectively. Estimated aggregate amortization expense for each of the next five years is as follows:

The changes in the carrying amount of goodwill for the nine months ended September 27, 2003 are as follows:

Certain prior year amounts have been reclassified to conform to current year consolidated financial statement presentation.

As disclosed in our Form 10-Q for the quarterly period ending March 29, 2003, the Company received notice in April 2003 that three shareholder class action lawsuits were filed against it. Subsequently, as disclosed in our Form 10-Q for the quarterly period ending June 28, 2003, five additional shareholder class lawsuits were filed against the Company. All these lawsuits were filed after a decline in Company’s stock price following the Company’s announcement on April 3, 2003 that the Company would not meet revenue and earnings estimates for the first quarter of 2003.

In general, the lawsuits allege that, during various class periods commencing as early as July 17, 2002 and ending April 2, 2003, the Company and individual named defendants misrepresented or failed to disclose certain factors, which they allege impacted the Company’s business and anticipated revenue and earnings, all allegedly in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

On August 20, 2003, the Court ordered that all of the lawsuits (as specifically identified in our Form 10-Q for the quarterly periods ending March 29, 2003 and June 28, 2003) be consolidated under Case No. 03-CV-00296-DW, appointed a Lead Plaintiff and approved Lead Counsel and Liaison Counsel for the plaintiffs. On September 30, 2003, the Court entered a scheduling order directing that the lawsuits be jointly captioned “In re Cerner Securities Litigation” and establishing a schedule for plaintiffs to file a Consolidated Amended Complaint and for the Company and the individual defendants to answer, object or otherwise respond to the Consolidated Amended Complaint. No discovery in the consolidated litigation will commence until the Court rules on a Motion to Dismiss, if one is filed, and the Company and the individual defendants have filed their Answers to the Consolidated Amended Complaint.

Given that the lawsuits have only recently been consolidated and that the Consolidated Amended Complaint has not yet been filed, we cannot currently predict the outcome of the litigation or the amount of any potential loss if our defense is unsuccessful; however, we believe that all the claims in the lawsuits are without merit and we intend to vigorously defend such claims. The named executive officers and the Company are insured persons within the coverage and subject to the limits of the Company’s Directors and Officers and Corporate Liability Insurance for such claims and notice of these claims has been given to the insurance carrier.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Three Months Ended September 27, 2003 Compared to Three Months Ended September 28, 2002

The Company’s revenues, including revenues from reimbursed travel, increased 5% to $206,292,000 for the three-month period ended September 27, 2003 from $196,989,000 for the three-month period ended September 28, 2002. Beginning in the first quarter of 2003, the Company began including proceeds from reimbursed travel expense in revenue with a corresponding amount included in cost of revenues. This change has no impact on the dollar amount of gross margin, operating margin, or net earnings, but does slightly change the percent of revenue each of these items represent. Net earnings decreased 13% to $12,047,000 in the 2003 period from $13,768,000 for the 2002 period. The decrease in net earnings was primarily due to an increase in costs and expenses compared to the prior year quarter.

System sales revenues decreased 6% to $80,193,000 for the three-month period ended September 27, 2003 from $84,866,000 for the corresponding period in 2002. Included in system sales are revenues primarily from the sale of software, hardware, sublicensed software and for the services required to install them. This decrease is due primarily to a lower percentage of current quarter contract bookings being recognized as revenue in the current quarter.

Support, maintenance and service revenues increased 13% to $118,774,000 during the third quarter of 2003 from $105,465,000 during the same period in 2002. Support and maintenance revenues were $51,916,000 and $42,720,000 for the third quarter of 2003 and 2002, respectively. Service revenues were $66,858,000 and $62,745,000 for the third quarter of 2003 and 2002, respectively. Included in support, maintenance and service revenues are support and maintenance of software and hardware, and professional services excluding installation. This increase was due primarily to the increase in the Company’s installed and converted client base and an increase in services related to and services provided into the Company’s installed and converted client base.

At September 27, 2003, the Company had $843,000,000 in contract backlog and $294,307,000 in support and maintenance backlog, compared to $691,887,000 in contract backlog and $263,688,000 in support and maintenance backlog at September 28, 2002.

The cost of revenues includes the cost of third party consulting services, computer hardware and sublicensed software purchased from computer and software manufacturers for delivery to clients and commissions. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to manufacturers. The cost of revenue was 22% of total revenues in the third quarter of 2003 and 2002. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, maintenance, support, and reimbursed travel) components carrying different margin rates changes from period to period.

Sales and client service expenses include salaries of sales and client service personnel, communications expenses and unreimbursed travel expenses. Also included are sales and marketing salaries, trade show costs and advertising costs. These expenses as a percent of total revenues were 41% and 42% in the third quarter of 2003 and 2002, respectively. The increase in total sales and client service expenses to $84,794,000 in the third quarter of 2003 from $82,166,000 in the same period of 2002 was attributable to the cost of a larger field sales and services organization and marketing of new solutions.

Software development expenses include salaries, documentation and other direct expenses incurred in product development and amortization of software development costs. Total expenditures for software development, including both capitalized and noncapitalized portions, for the third quarter of 2003 and 2002 were $45,431,000 and $39,730,000, respectively. These amounts exclude amortization. Capitalized software costs were $14,971,000 and $13,174,000 for the third quarter of 2003 and 2002, respectively. The increase in aggregate expenditures for software development in 2003 is due to continued development of Cerner Millennium^® software solutions.

General and administrative expenses include salaries for corporate, financial and administrative staffs, utilities, communications expenses, and professional fees. These expenses as a percent of total revenues were 7% in the third quarter of 2003 and 2002. Total general and administrative expenses for the third quarter of 2003 and 2002 were $15,083,000 and $13,216,000, respectively. The increase is due primarily to the growth of the Company’s core business and as a result of acquisitions.

Net interest expense was $1,703,000 in the third quarter of 2003 compared to $1,245,000 in the third quarter of 2002. This increase is due primarily to the completion of a $60,000,000 private placement of debt on December 20, 2002, pursuant to a Note Agreement dated December 15, 2002.

Nine Months Ended September 27, 2003 Compared to Nine Months Ended September 27, 2002

The Company’s revenues, including revenues from reimbursed travel, increased 8% to $612,178,000 for the nine-month period ended September 27, 2003 from $565,235,000 for the nine-month period ended September 28, 2002. Beginning in the first quarter of 2003, the Company began including proceeds from reimbursed travel expense in revenue with a corresponding amount included in cost of revenues. This change has no impact on the dollar amount of gross margin, operating margin, or net earnings, but does slightly change the percent of revenue each of these items represent. Net earnings decreased 30% to $26,583,000 in the 2003 period from $38,078,000 for the 2002 period. Net earnings for the nine months ended September 28, 2002 included a gain from the sale of shares of WebMD common stock of $2,736,000, net of tax and a charge of $786,000, net of tax, due to the cumulative effect of a change in accounting for goodwill. The decrease in net earnings was due to an increase in expenses compared to the prior year period as well as a non-operating gain on the sale of WebMD shares in 2002.

System sales revenues increased 1% to $241,529,000 for the nine-month period ended September 27, 2003 from $239,401,000 for the corresponding period in 2002. Included in system sales are revenues primarily from the sale of software, hardware, sublicensed software and for the services required to install them.

Support, maintenance and service revenues increased 13% to $347,946,000 during the first nine months of 2003 from $306,783,000 during the same period in 2002. Support and maintenance revenues were $149,956,000 and $126,833,000 for the first nine months of 2003 and 2002, respectively. Service revenues were $197,990,000 and $179,950,000 for the first nine months of 2003 and 2002, respectively. Included in support, maintenance and service revenues are support and maintenance of software and hardware, and professional services excluding installation. This increase was due primarily to the increase in the Company’s installed and converted client base and an increase in services related to and services provided into the Company’s installed and converted client base.

The cost of revenues includes the cost of third party consulting services, computer hardware and sublicensed software purchased from computer and software manufacturers for delivery to clients and commissions. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to manufacturers. The cost of revenue was 24% of total revenues in the nine-month period of 2003 and 2002, respectively. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, maintenance, support, and reimbursed travel) components carrying different margin rates changes from period to period.

Sales and client service expenses include salaries of sales and client service personnel, communications expenses and unreimbursed travel expenses. Also included are sales and marketing salaries, trade show costs and advertising costs. These expenses as a percent of total revenues were 42% and 41% in the nine-month period of 2003 and 2002, respectively. The increase in total sales and client service expenses to $259,531,000 in the nine-month period of 2003 from $233,421,000 in the same period of 2002 was attributable to the cost of a larger field sales and services organization and marketing of new software solutions.

Software development expenses include salaries, documentation and other direct expenses incurred in product development and amortization of software development costs. Total expenditures for software development, including both capitalized and noncapitalized portions, for the nine-month periods of 2003 and 2002 were $132,663,000 and $109,208,000, respectively. These amounts exclude amortization. Capitalized software costs were $43,720,000 and $36,089,000 for the nine-month periods of 2003 and 2002, respectively. The increase in aggregate expenditures for software development in 2003 is due to continued development of Cerner Millennium^® software solutions.

General and administrative expenses include salaries for corporate, financial and administrative staffs, utilities, communications expenses, and professional fees. These expenses as a percent of total revenues were 7% in the first nine months of 2003 and 2002. Total general and administrative expenses for the first nine months of 2003 and 2002 were $41,374,000 and $37,558,000, respectively. The increase is due primarily to the growth of the Company’s core business and as a result of acquisitions.

Net interest expense was $5,152,000 in the nine-month period of 2003 compared to $4,141,000 in the nine-month period of 2002. This increase is due primarily to the completion of a $60,000,000 private placement of debt on December 20, 2002, pursuant to a Note Agreement dated December 15, 2002.

In the second quarter of 2002, the Company sold 14,820,527 shares of WebMD for $90,119,000. Accordingly, the Company recorded an investment gain of $2,736,000, net of $1,572,000 in tax, as a result of the sale.

The Company’s effective tax rates were 40.0% and 39.0% for the first nine months of 2003 and 2002, respectively.

The Company’s liquidity position remains strong with total cash and cash equivalents of $119,805,000 at September 27, 2003 and working capital of $249,218,000. The Company generated cash from operating activities of $91,825,000 for the nine-month period ended September 27, 2003 and used cash from operating activities of $5,632,000 during the nine-month period ended September 28, 2002. In the 2002 period, the Company made a $31,200,000 tax payment, related to the sale of WebMD. Cash flow from operations also increased in the 2003 period, due to increased collection of receivables and improved payment terms.

Cash used in investing activities consisted primarily of purchases of capital equipment of $17,380,000 and $29,279,000, purchases of land, buildings, and improvements of $40,716,000 and $18,822,000, and capitalized software development costs of $43,720,000 and $36,089,000, in the first nine months of 2003 and 2002, respectively. The Company also used cash for the acquisition of a business of $19,129,000 in the first nine months of 2002. Cash provided from investing activities in the first nine months of 2002 included $90,119,000 from the proceeds from the sale of the WebMD stock.

The Company’s financing activities for the first nine months consisted primarily of the repayment of long-term debt of $13,084,000 and the purchase of treasury stock of $5,930,000. For the first nine months of 2002, the Company used cash for net repayments of long-term debt of $2,706,000.

The Company’s liquidity is influenced by many factors, including the amount and timing of the Company’s revenues, its cash collections from its clients as implementation of its software solutions proceed and the amounts the Company invests in software development and capital expenditures. The Company believes that its present cash position, together with cash generated from operations, and the Company’s line of credit will be sufficient to meet anticipated cash requirements during 2003. The Company has $90,000,000 of long-term, revolving credit from banks. At September 27, 2003, the Company had no outstanding borrowings under this agreement.

The effects of inflation on the Company’s business during the period discussed herein were minimal.

The Company believes that there are several accounting policies that are critical to understanding the Company’s historical and future performance, as these policies affect the reported amount of revenue and other significant areas involving management’s judgments and estimates. These significant accounting policies relate to revenue recognition, software development costs, other-than-temporary declines in the market value of investments, allowance for doubtful accounts, and potential impairments of goodwill. These policies and the Company’s procedures related to these policies are described in detail below and under specific areas within the discussion and analysis of the Company’s financial condition and results of operations.

Revenues are derived primarily from the sale of clinical, financial and administrative information systems and solutions. The components of the system sales revenues are the licensing of computer software, installation, subscription content and the sale of computer hardware and sublicensed software. The components of support, maintenance and service revenues are software support and hardware maintenance, remote hosting and outsourcing, training, consulting and implementation services.

The Company recognizes revenue in accordance with the provisions of Statement of Position (SOP) No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-4, SOP 98-9 and clarified by Staff Accounting Bulletin (SAB) 101 “Revenue Recognition in Financial Statements.” SOP No 97-2, as amended, generally requires revenue earned on software arrangements involving multiple-elements to be allocated to each element based on the relative fair values of those elements. Revenue from multiple-element software arrangements is recognized using the residual method. Under the residual method, revenue is recognized in a multiple-element arrangement when Company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement (i.e. professional services, software support, hardware maintenance, hardware and sublicensed software), but does not exist for one or more of the delivered elements in the arrangement (i.e. software solutions). The Company allocates revenue to each element in a multiple-element arrangement based on the element’s respective fair value, with the fair value determined by the price charged when that element is sold separately. Specifically, the Company determines the fair value of the maintenance portion of the arrangement based on the renewal price of the maintenance charged to clients; professional services portion of the arrangement, other than installation services, based on hourly rates which the Company charges for these services when sold apart from a software license; and, the hardware and sublicensed software, based on the prices for these elements when they are sold separately from the software. If evidence of the fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue under the arrangement is deferred until these elements have been delivered or objective evidence can be established.

Inherent in the revenue recognition process are significant management estimates and judgments, which influence the timing and the amount of revenue recognition. The Company provides several models for the procurement of its clinical, financial and administrative information systems. The predominant method is a perpetual software license agreement, project-related installation services, implementation and consulting services, computer hardware and sublicensed software and software support. For those arrangements involving the use of services, the Company uses the percentage of completion method of accounting, following the guidance in the AICPA Statement of Position No. 81-1 (SOP 81-1), Accounting for Performance of Construction-Type and Certain Production-Type Contracts.

The Company provides installation services, which include project-scoping services, conducting pre-installation audits and creating initial environments. Because installation services are deemed to be essential to the functionality of the software, software license and installation services fees are recognized over the software installation period using output measures which reflect direct labor hours incurred, beginning at software delivery and culminating at completion of installation, typically a three-to-nine month process.

The Company also provides implementation and consulting services, which include consulting activities that fall outside of the scope of the standard installation services. These services vary depending on the scope and complexity requested by the client. Examples of such services may include additional database consulting, system configuration, project management, testing assistance, network consulting and post conversion review services. Implementation and consulting services generally are not deemed to be essential to the functionality of the software, and thus do not impact the timing of the software license recognition, unless software license fees are tied to implementation milestones. In those instances, the portion of the software license fee tied to implementation milestones is deferred until the related milestone is accomplished and related fees become billable and non-forfeitable. Implementation fees are recognized over the service period, which may extend from nine months to three years.

Remote hosting and outsourcing services are marketed under long-term arrangements generally over periods of five to 10 years. Revenues from these arrangements are recognized as the services are performed.

Software maintenance fees are marketed under annual and multi-year arrangements and are recognized as revenue ratably over the contracted maintenance term. Hardware maintenance revenues are billed and recognized monthly over the contracted maintenance term.

Subscription and content fees are generally marketed under annual and multi-year agreements and are recognized ratably over the contracted terms.

Hardware and sublicensed software sales are generally recognized upon delivery to the client.

The Company also offers its solutions on an application service provider (“ASP”) or a term license basis, making available Company software functionality on a remote processing basis from the Company’s data centers. The data centers provide system and administrative support as well as processing services. Revenue on software and services provided on an ASP or term license basis is recognized on a monthly basis over the term of the contract. The Company capitalizes related direct costs consisting of third-party costs and direct software installation and implementation costs. These costs are amortized over the term of the arrangement.

In limited cases where the Company has contractually agreed to develop new or customized software code for a client, the Company utilizes percentage of completion accounting in accordance with SOP 81-1.

Deferred revenue is comprised of deferrals for license fees, maintenance and other services for which payment has been received and for which the service has not yet been performed.

Costs incurred internally in creating computer software solutions are expensed until technological feasibility has been established upon completion of a detailed program design. Thereafter, all software development costs are capitalized and subsequently reported at the lower of amortized cost or net realizable value. Capitalized costs are amortized based on current and expected future revenue for each solution with minimum annual amortization equal to the straight-line amortization over the estimated economic life of the solution. The Company is amortizing capitalized costs over five years. During the first nine months of 2003 and 2002, the Company capitalized $43,720,000 and $36,089,000, respectively, of total software development costs of $132,663,000 and $109,208,000, respectively.

The Company expects that major software information systems companies, large information technology consulting service providers and systems integrators, internet-based start-up companies and others specializing in the health care industry may offer competitive products or services. The pace of change in the health care information systems market is rapid and there are frequent new product introductions, product enhancements and evolving industry standards and requirements. As a result, the capitalized software may become less valuable or obsolete and could be subject to impairment.

The Company accounts for its investments in equity securities, which have readily determinable fair values as available-for-sale. Available-for-sale securities are reported at fair value with unrealized gains and losses reported, net of tax, as a separate component of accumulated other comprehensive income. For realized gains and losses on available-for-sale investments, the Company utilizes the specific identification method as the basis to determine cost. Investments in the common stock of certain affiliates over which the Company exerts significant influence are accounted for by the equity method.

All equity securities are reviewed by the Company for declines in fair value. If such declines are considered to be other than temporary, the cost basis of the individual security is written down to fair value as a new cost basis, and the amount of the write-down is included in earnings.

The Company also has certain other minority equity investments in non-publicly traded securities. These investments are generally carried at cost as the Company owns less than 20% of the voting equity and does not have the ability to exercise significant influence over these companies. The balance of these investments at September 27, 2003 and December 28, 2002 was $876,000. These investments are inherently high risk as the market for technologies and content by these companies are usually early stage at the time of the investment by the Company and such markets may never be significant. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future. The Company could lose its entire investment in certain or all of these companies. The Company monitors these investments for impairment and makes appropriate reductions in carrying values when necessary.

Substantially all of the Company’s cash and cash equivalents and short-term investments are held at three major U.S. financial institutions. The majority of the Company’s cash equivalents consist of U.S. Federal Government Agency Securities, short-term marketable securities, and overnight repurchase agreements. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and, therefore, bear minimal risk.

Substantially all of the Company’s clients are integrated delivery networks, hospitals, and other health care-related organizations. If significant adverse macro-economic factors were to impact these organizations, it could materially adversely affect the Company. The Company’s access to certain software and hardware components are dependent upon single and sole source suppliers. The inability of any supplier to fulfill supply requirements of the Company could affect future results.

The Company performs ongoing credit evaluations of its clients and generally does not require collateral from its clients. The Company maintains an allowance for potential losses on a specific identification basis and based on historical experience and management’s judgments. The Company’s allowance for doubtful accounts as of September 28, 2003 and December 28, 2002 was $11,155,000 and $9,502,000, respectively.

Effective December 30, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” As a result, goodwill and intangible assets with indefinite lives are no longer amortized but are evaluated for impairment annually or whenever there is an impairment indicator. All goodwill is assigned to a reporting unit, where it is subject to an impairment test based on fair value. The Company completed its review of the Company’s goodwill values in the second quarter of 2002. As a result of this review, the Company determined that goodwill arising from the acquisition of Mitch Cooper and Associates was impaired due to declining demand and margins in this business. Mitch Cooper and Associates was a supply chain re-engineering consulting practice. The impairment charge to reflect this goodwill at fair value was $786,000, net of tax, and is reflected as a cumulative effect of a change in accounting principle as of the beginning of 2002. The Company used a discounted cash flow analysis to determine the fair value of the reporting units. The Company completed three acquisitions subsequent to June 30, 2001, which resulted in approximately, $36.7 million of goodwill that was not amortized in accordance with SFAS 142. The Company’s 2003 review of goodwill was completed in the second quarter of 2003 and indicated that goodwill was not impaired.

Factors that may Affect Future Results of Operations, Financial Condition or Business

Statements made in this report, the Annual Report to Shareholders in which this report will be made a part, other reports and proxy statements filed with the Securities and Exchange Commission, communications to shareholders, press releases and oral statements made by representatives of the Company that are not historical in nature, or that state the Company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future, may constitute “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can often be identified by the use of forward-looking terminology, such as “could,” “should,” “will,” “will be,” “will lead,” “will assist,” “intended,” “continue,” “believe,” “may,” “expect,” “hope,” “anticipate,” “goal,” “forecast,” “plan,” or “estimate” or variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. It is important to note that any such performance and actual results, financial condition or business, could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below as well as those discussed elsewhere in reports filed with the Securities and Exchange Commission. Other unforeseen factors not identified herein could also have such an effect. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.

Quarterly Operating Results May Vary — The Company’s quarterly operating results have varied in the past and may continue to vary in future periods. Quarterly operating results may vary for a number of reasons including accounting policy changes mandated by regulating entities (including, but not limited to, any accounting policy change concerning the expensing of options), demand for the Company’s software solutions and services, the Company’s long sales cycle, potentially long installation and implementation cycle for these larger, more complex and costlier systems and other factors described in this section and elsewhere in this report. As a result of health care industry trends and the market for the Company’s Cerner Millennium^® solutions, a large percentage of the Company’s revenues are generated by the sale and installation of larger, more complex and costlier systems. The sales process for these systems is lengthy and involves a significant technical evaluation and commitment of capital and other resources by the client. The sale may be subject to delays due to clients’ internal budgets and procedures for approving large capital expenditures and by competing needs for other capital expenditures and deploying new technologies or personnel resources. Delays in the expected sale or installation of these large contracts may have a significant impact on the Company’s anticipated quarterly revenues and consequently its earnings, since a significant percentage of the Company’s expenses are relatively fixed.

These larger, more complex and costlier systems are installed and implemented over time periods ranging from approximately one month to three years and may involve significant efforts both by the Company and the client. The Company recognizes revenue upon the completion of standard milestone conditions and the amount of revenue recognized in any quarter depends upon the Company’s and the client’s ability to meet these project milestones. Delays in meeting these milestone conditions or modification of the contract relating to one or more of these systems could result in a shift of revenue recognition from one quarter to another and could have a material adverse effect on results of operations for a particular quarter. In addition, support payments by clients for the Company’s solutions generally do not commence until the solution is in use.

The Company’s revenues from system sales historically have been lower in the first quarter of the year and greater in the fourth quarter of the year, primarily as a result of the clients’ year-end efforts to make all final capital expenditures for the current year.

Stock Price May Be Volatile — The trading price of the Company’s common stock may be volatile. The market for the Company’s common stock may experience significant price and volume fluctuations in response to a number of factors including actual or anticipated quarterly variations in operating results, rumors about the Company’s performance or software solutions, changes in expectations of future financial performance or changes in estimates of securities analysts, governmental regulatory action, health care reform measures, client relationship developments, changes occurring in the securities markets in general and other factors, many of which are beyond the Company’s control. As a matter of policy, the Company does not generally comment on rumors.

Furthermore, the stock market in general, and the market for software, health care and high technology companies in particular, has experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of the Company’s common stock, regardless of actual operating performance.

Changes in the Health Care Industry — The health care industry is highly regulated and is subject to changing political, economic and regulatory influences. For example, the Balanced Budget Act of 1997 (Public Law 105-32) contains significant changes to Medicare and Medicaid and began to have its initial impact in 1998 due to limitations on reimbursement, resulting cost containment initiatives, and effects on pricing and demand for capital intensive systems. In addition, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) will have a direct impact on the health care industry by requiring identifiers and standardized transactions/code sets and necessary security and privacy measures in order to ensure the protection of patient health information. These factors affect the purchasing practices and operation of health care organizations. Federal and state legislatures have periodically considered programs to reform or amend the United States health care system at both the federal and state level and to change health care financing and reimbursement systems. These programs may contain proposals to increase governmental involvement in health care, lower reimbursement rates or otherwise change the environment in which health care industry participants operate. Health care industry participants may respond by reducing their investments or postponing investment decisions, including investments in the Company’s software solutions and services.

Many health care providers are consolidating to create integrated health care delivery systems with greater market power. These providers may try to use their market power to negotiate price reductions for the Company’s software solutions and services. As the health care industry consolidates, the Company’s client base could be eroded, competition for clients could become more intense and the importance of acquiring each client becomes greater.

Significant Competition — The market for health care information systems is intensely competitive, rapidly evolving and subject to rapid technological change. The Company believes that the principal competitive factors in this market include the breadth and quality of system and software solution offerings, the stability of the information systems provider, the features and capabilities of the information systems, the ongoing support for the system and the potential for enhancements and future compatible software solutions.

Certain of the Company’s competitors have greater financial, technical, product development, marketing and other resources than the Company and some of its competitors offer software solutions that it does not offer. The Company’s principal existing competitors include GE Medical Systems, Siemens Medical Solutions Health Services Corporation, IDX Systems Corporation, McKesson Corporation, Eclipsys Corporation, Medical Information Technology, Inc. (“Meditech”) and Epic Systems Corporation, each of which offers a suite of software solutions that compete with many of the Company’s software solutions and services. There are other competitors that offer a more limited number of competing software solutions.

In addition, the Company expects that major software information systems companies, large information technology consulting service providers and system integrators, internet-based start-up companies and others specializing in the health care industry may offer competitive software/solutions or services. The pace of change in the health care information systems market is rapid and there are frequent new software solution introductions, software solution enhancements and evolving industry standards and requirements. As a result, the Company’s success will depend upon its ability to keep pace with technological change and to introduce, on a timely and cost-effective basis, new and enhanced software solutions and services that satisfy changing client requirements and achieve market acceptance.

Proprietary Technology May Be Subjected to Infringement Claims or May Be Infringed Upon — The Company relies upon a combination of license agreements, confidentiality procedures, employee nondisclosure agreements and technical measures to maintain the confidentiality and trade secrecy of its proprietary information. The Company also relies on trademark and copyright laws to protect its intellectual property. The Company has initiated a patent program but currently has a very limited patent portfolio. As a result, the Company may not be able to protect against misappropriation of its intellectual property.

In addition, the Company could be subject to intellectual property infringement claims as the number of competitors grows and the functionality of its software solutions and services overlaps with competitive offerings. These claims, even if not meritorious, could be expensive to defend. If the Company becomes liable to third parties for infringing their intellectual property rights, it could be required to pay a substantial damage award and to develop noninfringing technology, obtain a license or cease selling the software solutions that contain the infringing intellectual property.

Government Regulation — The United States Food and Drug Administration (the “FDA”) has declared that software products intended for the maintenance of data used in making decisions regarding the suitability of blood donors and the release of blood or blood components for transfusion are medical devices under the Federal Food, Drug and Cosmetic Act (“Act”) and amendments to the Act. As a consequence, the Company is subject to extensive regulation by the FDA with regard to its blood bank software. If other of the Company’s software solutions are deemed to be actively regulated medical devices by the FDA, the Company could be subject to extensive requirements governing pre- and post-marketing requirements including pre-market notification clearance prior to marketing. Complying with these FDA regulations would be time consuming and expensive. It is possible that the FDA may become more active in regulating computer software that is used in health care.

Following an inspection by the FDA in March of 1998, the Company received a Form FDA 483 (Notice of Inspectional Observations) alleging non-compliance with certain aspects of FDA’s Quality System Regulation with respect to the Company’s PathNet^® HNAC Blood Bank Transfusion and Donor products (the “Blood Bank Products”). The Company subsequently received a Warning Letter, dated April 29, 1998, as a result of the same inspection. The Company responded promptly to the FDA and undertook a number of actions in response to the Form 483 and Warning Letter including an audit by a third party of the Company’s Blood Bank Products and improvements to Cerner’s Quality System. A copy of the third party audit was submitted to the FDA in October of 1998 and, at the request of the FDA, additional information and clarification were submitted to the FDA in January of 1999.

There can be no assurance, however, that the Company’s actions taken in response to the Form 483 and Warning Letter will be deemed adequate by the FDA or that additional actions on behalf of the Company will not be required. In addition, the Company remains subject to periodic FDA inspections and there can be no assurances that the Company will not be required to undertake additional actions to comply with the Act and any other applicable regulatory requirements. Any failure by the Company to comply with the Act and any other applicable regulatory requirements could have a material adverse effect on the Company’s ability to continue to manufacture and distribute its software solutions. The FDA has many enforcement tools including recalls, seizures, injunctions, civil fines and/or criminal prosecutions. Any of the foregoing could have a material adverse effect on the Company’s business, results of operations or financial condition.

Product Related Liabilities — Many of the Company’s software solutions provide data for use by health care providers in providing care to patients. Although no such claims have been brought against the Company to date regarding injuries related to the use of its software solutions, such claims may be made in the future. Although the Company maintains product liability insurance coverage in an amount that it believes is sufficient for its business, there can be no assurance that such coverage will cover a particular claim that may be brought in the future, prove to be adequate or that such coverage will continue to remain available on acceptable terms, if at all. A successful claim brought against the Company, which is uninsured, or under-insured could materially harm its business, results of operations or financial condition.

System Errors and Warranties — The Company’s systems, particularly the Cerner Millennium^® versions, are very complex. As with complex systems offered by others, the Company’s systems may contain errors, especially when first introduced. Although the Company conducts extensive testing, it has discovered software errors in its software solutions after their introduction. The Company’s systems are intended for use in collecting and displaying clinical information used in the diagnosis and treatment of patients. Therefore, users of the Company software solutions have a greater sensitivity to system errors than the market for software products generally. The Company’s agreements with its clients typically provide warranties against material errors and other matters. Failure of a client’s system to meet these criteria could constitute a material breach under such contracts allowing the client to cancel the contract and obtain a refund and/or damages, or could require the Company to incur additional expense in order to make the system meet these criteria. The Company’s contracts with its clients generally limit the Company’s liability arising from such claims but such limits may not be enforceable in certain jurisdictions or circumstances.

Anti-Takeover Defenses — The Company’s charter, bylaws, shareholders’ rights plan and certain provisions of Delaware law contain certain provisions that may have the effect of delaying or preventing an acquisition of the Company. Such provisions are intended to encourage any person interested in acquiring the Company to negotiate with and obtain the approval of the Board of Directors in connection with any such transaction. These provisions include (a) a Board of Directors that is staggered into three classes to serve staggered three-year terms, (b) blank check preferred stock, (c) supermajority voting provisions, (d) inability of shareholders to act by written consent or call a special meeting, (e) limitations on the ability of shareholders to nominate directors or make proposals at shareholder meetings and (f) triggering the exercisability of stock purchase rights on a discriminatory basis, which may invoke extensive economic and voting dilution of a potential acquirer if its beneficial ownership of the Company’s common stock exceeds a specified threshold. Certain of these provisions may discourage a future acquisition of the Company not approved by the Board of Directors in which shareholders might receive a premium value for their shares.

Risks Associated with the Company’s Global Operations – The Company markets, sells and services its software solutions globally. The Company has established offices around the world, including in North America, Europe and in the Asia Pacific region. The Company will continue to expand its global operations and enter new global markets. This expansion will require significant management attention and financial resources to develop successful direct and indirect global sales and support channels. In some countries, the Company’s success will depend in part on its ability to form relationships with local partners. There is a risk that the Company may sometimes choose the wrong partner. For these reasons, the Company may not be able to maintain or increase global market demand for its software solutions.

Global operations are subject to inherent risks, and the Company’s future results could be adversely affected by a variety of uncontrollable and changing factors. These include:

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Greater difficulty in collecting accounts receivable and longer collection periods;

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Political conditions which may threaten the safety of associates or the continued presence of the Company in these countries.

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 27, 2003. Based upon that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the design and operation of the Company’s disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective to accomplish their objectives.

In addition, there was no change in the Company’s disclosure controls and procedures and internal control over financial reporting that occurred during the quarter ended September 27, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

On August 20, 2003, the Court ordered that all of the lawsuits (as specifically identified in our Form 10-Q for the quarterly periods ending March 29, 2003 and June 28, 2003) be consolidated under Case No. 03-CV-00296-DW, appointed a Lead Plaintiff and approved Lead Counsel and Liaison Counsel for the plaintiffs. On September 30, 2003, the Court entered a scheduling order directing that the lawsuits be jointly captioned “In re Cerner Securities Litigation” and establishing a schedule for plaintiffs to file a Consolidated Amended Complaint and for the Company and the individual defendants to answer, object or otherwise respond to the Consolidated Amended Complaint. No discovery in the consolidated litigation will commence until the Court rules on a Motion to Dismiss, if one is filed, and the Company and the Individual defendants have filed their Answers to the Consolidated Amended Complaint.


(a)	Exhibits

	31.1	Certification of Chief Executive Officer of Cerner Corporation dated October 31, 2003, pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended.

	31.2	Certification of Chief Financial Officer of Cerner Corporation dated October 31, 2003, pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended.

	32.1	Certification of Chief Executive Officer of Cerner Corporation dated October 31, 2003, pursuant to 18 U.S.C. Section. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, which is accompanying this quarterly report and is not treated as filed in reliance on Section 601(b)(32) of Regulation S-K.

	32.2	Certification of Chief Financial Officer of Cerner Corporation dated October 31, 2003, pursuant to 18 U.S.C. Section. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, which is accompanying this quarterly report and is not treated as filed in reliance on Section 601(b)(32) of Regulation S-K.

(b)	Reports on Form 8-K

	The following Reports on Form 8-K were filed by the Company during the quarter for which this report is filed:

	Report on Form 8-K filed on July 16, 2003 which contained the text of the Press Release issued that same date announcing earnings for the second quarter of 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 27, 2003

		OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to


Delaware		43-1196944

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)


Part I. Financial Information
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
Part II. Other Information
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-31.1 Certification of CEO - Rule 13a-15(e)
EX-31.2 Certification of CFO - Rule 13a-15(e)
EX-32.1 Certification of CEO - Section 906
EX-32.2 Certification of CFO - Section 906


For the remaining three months:	2003	$	1,529
For year ended:	2004		5,929
	2005		5,342
	2006		4,083
	2007		1,743


Balance as of December 28, 2002	$	45,938
Goodwill acquired during the nine months ended September 27, 2003		—
Foreign currency translation adjustment at September 27, 2003		1,284

Balance as of September 27, 2003	$	47,222

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	CERNER CORPORATION Registrant

November 5, 2003		By: /s/ Marc G. Naughton

Date		Marc G. Naughton Chief Financial Officer